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Wins & Insights

Tenant Leasing Illustrated – Sept 2013 – Lease On A Hot Tin Roof

Lease On A Hot Tin Roof

Mendacity, mendacity, mendacity.

It seems lately like everyone is telling us stories and we are all stuck in a Tennessee Williams play (“there ain’t nothin’ more powerful than the odor of mendacity…”).

We have candidates running for New York City Mayor and Comptroller who keep the tabloid headline writers hopping. We have Lance Armstrong losing all of his Tour de France medals. We have Major League Baseball suspending 13 players, including Ryan Braun who just recently insisted upon his innocence. We have A Rod being A Rod.

The natural first question is, why is it that when any of my Mets use steroids they still only hit .180 (see, Jordany Valdespin)? They should get their money back! Although my friend Matt claims that even Mr. Met is “juicing” (“just look at the size of his head!” he exclaims).

And now, perhaps the most crushing blow. I have to admit that Tenant Leasing Illustrated is not perfect. We are human and have made some mistakes and must apologize to anyone we may have offended or disappointed. We love the game of commercial leasing and are humbled and thrilled to be a part of it. After this admission, we hope to put this matter behind us, once and for all.

Yes, that’s right, we have not been completely truthful. We have been telling our readers that tenants must always have the flexibility to pursue legitimate business transactions and that every lease must be structured to allow the tenant to sell its business without landlord consent.

But that steadfast rule does not always apply with restaurant leases. In fact, over the past few years, the trend has been running in the other direction.

Why? Glad you asked.

The main reason is that, with a restaurant, maintaining the tenant’s net worth or credit level is not the landlord’s only consideration. The character, reputation and “buzz” of the restaurant owner or operator is a critical element in preserving the dignity, class and presentation for which the landlord bargained.

Landlords can be as vain as the rest of us (okay, probably more so) and they can fall in love with the notion of a particularly “hot concept” or celebrity chef in their building. And from a business perspective, the right restaurant can add a certain buzz to a building and improve foot traffic and leasing opportunities.

In addition, if the lease provides for percentage rent (where the landlord shares in a portion of the tenant’s gross receipts over an agreed upon breakpoint), then the particular restaurant owner can have a direct effect on the landlord’s bottom line.

Landlords also are sensitive that a sale of the restaurant business is in no small part a sale of the real estate, particularly with a restaurant that is doing poorly, in which event the buyer may be paying for the location, especially an under-market location.

Tenants may (and should) argue that the landlord is still getting the rent it bargained for, but this argument gets tougher if, as with many restaurant leases, the tenant has negotiated a longer than usual term (i.e., more than ten years) in order to amortize its build out.

You need to be mindful of these landlord concerns, but also strengthen your position by taking these six performance enhancing approaches:

  • As with any lease, look for the right to assign or sublease in connection with a sale of your business without landlord’s consent. Landlords may resist, but your initial position should be no different than with any other lease.​
  • If consent is required, hold the landlord to a reasonableness standard. Landlord’s will often hold out for a right to unilaterally determine whether your proposed assignee/purchaser is acceptable. This can be a recipe for extortion and should be resisted.​
  • Include in the lease specific standards quantifying “reasonable”. The more specific you can be as to the required character, experience and financial backing of the assignee/purchaser, the less likely you will end up in a dispute with your landlord. You may need to be practical in eliminating certain categories of assignee/purchasers (e.g., chain restaurants, fast food establishments, etc.) depending on the location of the space and the landlord.​
  • Consider providing specific financial incentives for your landlord. Although “key money” can be a dirty phrase, the certainty of knowing that you can freely sell and assign without interference from your landlord may be worth a set payment, a rent bump and/or an increase in the required security deposit.​
  • Provide for expedited dispute resolution. With a quick and objective method of dispute resolution, such as expedited arbitration, you will have the opportunity to make your case before a disinterested third party and avoid subjective rejections by your landlord. As we have said before, an expedited dispute resolution method really needs to expedite, particularly with a purchaser that could be lost if it takes too long.​
  • Obtain a release from your guaranty and substitution of your purchaser as guarantor, all as part of the assignment/subletting negotiation. Such a release would need to be negotiated up front, and is particularly relevant in the case of a good guy guaranty.​

In these days when everyone is looking for an advantage, whether fair or unfair, nobody wants to be under a cloud of suspicion, as when Rosie O’Donnell accused Larry David on Curb Your Enthusiasm of being a “singles hitter” who is suddenly a “power hitter”. But you can legitimately bulk up your restaurant assignment/subletting provision if you take note of our six suggestions. As for A Rod, maybe it is not too late to run for NYC Mayor.​